Mean tests: middle class welfare or redistributive fairness?

There is a
current pre-budget flurry of name calling about certain types of payments which
involves elements of gender bias and of moral panic. The term ‘middle class
welfare’ is being hurled at a comparatively small range of payments such as the
baby bonus and some family payments, while much bigger concessional tax
treatments on super payments or certain types of investment income are rarely
targeted. This topic
makes odd bedfellows: Tony Abbott’s recent defence of differing purposes for
such payments was headlined ‘even the rich need some
handouts’! and shows that these are arguments that need to be
advanced carefully. The debates about the public sphere and public
payments need to be connected as many people who support universal public
services may also not see universal payments as part of the same arguments.
There is a logic in making universal payments to some to achieve social and
equity ends that is rarely explored.

It was an email
from a journalist asking me why John Howard had given baby bonuses to rich
mothers that started my thinking through how to explain income testing problems
in the present policy climate. I rang him back to explain that the baby bonus
payment was a bit different to other payments because it was a substitute
maternity leave. It had been introduced to stymie pressure from women’s group
to implement a HREOC proposal that the government fund 14 weeks paid maternity
leave at the minimum wage as we were one of only two OECD countries without this type
of universal paid leave.

The journalist
accepted the argument that as this was not welfare but a work related
entitlement, it shouldn’t be means tested on family income. I didn’t explain
one of our concerns had been that as it was a universal birth payment, it was
not therefore work related nor did it carry leave entitlements, so could be
deemed to be welfare.

His next
question showed up the ideological base of that decision: did Howard take on
the universal baby payment because it would be cheaper than funding maternity
leave? Not so. I explained that the baby payment last year cost nearly $1.2
billion, more than twice as much as the proposed paid maternity leave option.
This made it clear that the basis of the decision was the reluctance of the Howard
Government to recognise some mothers had both babies and paid jobs. Therefore
it is not a leave payment but a costs offsetting one.

Much of the
policy on government payments, concessions and means testing is based on ideological assumptions about public
entitlements and payments. There is little real difference in financial terms
between direct payments to people and tax concessions, rebates and other ways
of reducing income tax liabilities. The latter group of indirect payments are
seen by most as legitimate and different from payments made to people. Yet the
net results to the budget are the same (except maybe for some administrative
costs).

If much of
the present public fuss were focused on the concessional taxation on super and earnings for those in top and middle tax brackets, which is upper class welfare, I would support
the calls for change. Why do we need to contribute extra public money to high
income earners who save anyhow, while we do not compensate low income earners for
excessive tax on their compulsory super and its earnings? Few of the higher
income earners who benefit will, however, publicly acknowledge this type of tax
expenditure as a waste of public money.

In the tax
literature there are two ways of explaining tax liabilities: one is horizontal
equity and the other, vertical equity. In the first case, taxation and payment
levels are assessed on comparative capacity to pay. For instance, a family with
children on a certain income has more demand on their income than one on a
similar income but without children. Therefore, a tax reduction or direct
payment that offsets some of the extra costs of children creates equity between
those with and without children and recognises that child rearing is generally
seen as having public benefits as well as private ones. In the case of vertical equity, there are
justifications for redistribution of income from those assumed to have an
excess to those who may need more to achieve an acceptable living standard –
often as direct payments. This type of payment triggers public questions about defining levels of need and worthiness for support, as well
as claims that it encourages sloth or dependence.

There is a
wider question: who should be entitled to diverse forms of government financial
support, regardless of its form of delivery? What support should businesses be
able to claim? What are the justifications for rebates, concessions and
payments for certain types of approved activities, such as saving for
retirement, mobility costs or rearing children? Should eligibility in such
cases be regardless of other income? Or should people only be entitled to
public financial support when they cannot, for good reasons, pay their own way?
What is the role of progressive tax to even out incomes versus income testing
particular payments? What are the relative costs of churning ( i.e. retrieving
universal payments from the better off via tax) versus income testing with high
effective marginal tax rates on extra income? Which creates better long term
equity when paid work disincentives are also costed?

De facto, our
system mixes up all types of redistributions of public monies, sometimes
deliberately to buy favours (e.g. self funded retirees) and sometimes to
encourage certain types of behaviours such as the health insurance rebate or
first home ownership. Via sumptuary taxes, we tax some spending heavily – such
as gambling, cigarettes, alcohol and petrol – and exempt fresh food from
consumption taxes. Do the taxes deter certain behaviours or just make more
money and penalise the addicted poor?

The massive
impact of means testing on low and middle income families, on second income
earners in families and on those moving into paid work is too often accepted as
an unfortunate given but may be a cause
of additional problems. Some recent work on sole parents moving off welfare
shows that net gains of income and living standards are often impossible because of loss of income support and attached
benefits. Should we not recognise that sole parents need more substantial
access to non-income tested payments to encourage workforce participation?

Further, we
need to ask what is the appropriate use of the tax pool? We accept the
collection of taxation and other forms of government income on the assumption
that it will be spent for the public good – and sometimes our own benefit.
Governments know that withdrawing payments and other benefits is always hard
and elections are sometimes won by bribery. This is often based on wrong
assumptions: despite many surveys indicating voters would prefer good services over tax cuts, politicians assume that voters are venal and try to buy votes.

This encourages
auctions for favours with groups pushing for their own concessions and benefits
and, in the process, undermining other claims. The easiest targets are those
who receive open and obvious payments – for example welfare recipients such as sole
parents. These groups have already copped many cuts, as have payments for children that
mainly go to mothers. The frequency of attacks on these payments, under the label of ‘middle class welfare’, makes me suspicious that some
of it is gender driven as males protect their privileges in higher income
areas.

It is
interesting to contrast the public fuss over the baby bonus with the lack of
questioning of other payments, such as the private health rebate. Should tax-payers be entitled to access to public monies if they choose not to use universal public services?
What are the justifications for both the health insurance rebate and the basic
funding for wealthy private schools? Such payments pose an increasing problem
as they encourage two tier systems in education and health and fuel demands for further
subsidising of private choices.

This in turn leads
to quality diminution and queuing for public services – and/or more complex eligibility testing to ensure that all pay what they
can afford. Yet other services like public transport fares are not varied. The public benefits of trains are seen as good enough
to be subsidised for all. Maybe the root and branch inquiry into tax promised
after the 2020 summit will be able to examine not only what we collect but who
is entitled to relief and why. If our
payment system is to be a tax-funded form of equitable public pooling of risks and
support payments, it should be able to define the eligibility for payments for
particular life events. Child bearing, rearing, illness, caring for others,
ageing and disability involve additional costs, so payments to cover these
could be seen as entitlements and not dependent on other income, compliance in
behaviours or access to other resources.

The costs of
means testing payments also tend to be overlooked. Apart from the bureaucratic tangles and time taken to process, there
are many other consequences that need to be measured against any perceived cash
savings. Where the payment is a replacement for other payments, such as income
support, there are obvious arguments that forms of income testing are
legitimate. However, wider use creates myriad other problems for both those who
dispense payments and for recipients. Few can understand the complexity of
estimating income – which leads to avoidance of extra income and behaviour changes.

Payments which
are means tested raise questions on the impact of effective marginal tax rates
(EMTR). The EMTR is total clawback that occurs at certain income points when
recipients of income tested benefits add in extra earned income. Its components
include the withdrawal of income support payments (30 to 100%), the normal tax at
certain levels, the withdrawal of other benefits like state concessions, health
care cards, and public housing rental levels. These result in ‘traps’ at
various points where extra money earned may actually reduce net income or make
it not worthwhile to earn income at all – once additional costs like work costs,
fares and child care are added on.

These high
effective tax rates operate on low and middle income earners as a
disincentive for further workforce participation. This is particularly
problematic for those with care responsibilities who have also to balance conflicting time demands, and are often the second income earner. Recent
figures from the Australian Fair Pay Commission estimated how much of each
extra dollar earned would be retained by someone on the minimum wage moving off
income support. It showed that single people would retain 38c in each dollar,
those sole parents on parenting payments (child under eight or grandfathered)
would keep 50c and a couple with children (one worker) 40c – and presumably other
sole parents the same. Add in some costs for going to work: clothes, child
care, fares etc and it is clear that the incentive to find paid work is very
limited. The Welfare to Work criterion for forced acceptance of a job is
netting $25 for 15 hours of work, less than $2 per hour!

Policy makers
also often omit to take into account the psychological effects of means
testing. Many recipients of benefits avoid
earning because they are scared of
losing the security of the payment and don’t understand how it works. Others,
particularly the aged, engage advisers and buy products designed to assist
people in claiming some pension so they can get the fringe benefits. The result
is a system seen as unfair and very mean at its lower levels, but offering
quite well off people benefits by using unethical, if not illegal, means of
diminishing property and income.

Universal
payments for some benefits can mitigate the problem by reducing the effect of
other payment withdrawals. In the 1970s both major political parties supported
the concept of a universal aged pension. The process was started when the
Whitlam Government abolished the means test for those over 70 – a move supported,
verbally at least, by Malcolm Fraser in 1975.
At that time we also had a universal child payment which had been
introduced as a child endowment in the 1940s to supplement the basic wage
during war time austerity. This
payment continued and was improved until well into the 1980s. However, since the late 1970s, there has been a
major shift in the way we see government and how it should assist people. With
the rise of neo-liberalism, pressure to lower expectations of collective,
public support has increased. This in turn has led to more targeting of
payments on the basis of need – which in welfare policy terms is referred to as
means testing. Because of the moral panic around welfare as a waste of public
money and the unfair scapegoating of recipients as lacking moral fibre, I
prefer to call it mean testing.